Meredith Whitney – State-issued GO Muni Bonds are Safe

May 7th, 2013

by Ben Huebscher

Whitney again made headlines in 2010 for predicting in a 60 Minutes interview that states would soon begin defaulting on municipal bonds. Budgets weren’t being cut and tax revenue wasn’t increasing – the money had to come from somewhere, she said. She continues to concentrate her time on investigating state finances and said she will likely continue to do so for much of her career.

After releasing her report, Whitney began to garner a bullish reputation, which bothered her. “I understood where growth wouldn’t come from, and then I started to think about where growth would come from,” she said. Whitney found growth in the country’s central corridor – by avoiding the housing boom, it also avoided the housing bust. She found consumer spending there was outpacing spending on the coasts by 30%, funded by the cheap natural gas found in the region’s shale formations and new manufacturing jobs in the chemical industry.

The state of the States

Whitney’s findings on the municipal market will be detailed in a book slated for release next month. She said the municipal market is easier to understand than corporate finances because of its required transparency. States must submit budgets a year (sometimes two) before they are implemented or as she put it, you get “to see their playbook” (a sports analogy she admitted her husband, pro wrestler John Layfield, feels she is unqualified to make).

She continues to be pessimistic about the municipal bond market where governors will be faced with the unenviable decision to pay back the bonds or invest in the reeducation and relocation the state needs to retain employees. But she's optimistic about GO bonds.

“GO bonds have the tax backing of the states,” she said. “What I’ve worried about was never the state-issued GO bonds. It was the localities, because the states can always cut off the localities.”

She added that 40% of local funding has to come from the states. Some states – like Ohio – have cut back on that funding by as much as 30%, she said, which has forced cutbacks in education and social services.

Whitney previewed some findings from her book at the conference. She predicted an oncoming middle-class migration towards the central corridor leading to a “negative feedback loop from hell” in coastal states. Burdened by existing debt, those coastal states will increasingly lose the tax revenue they need to invest in job creation. But if advisors look to the central corridor, she said they’ll discover lots of long-term opportunities for investment in the states poised to benefit from the infusion of new workers exiled from the coast.